The flow of disturbing earnings results from retailers such as J.C. Penney (JCP) last week raised fresh questions about the spending strength of U.S. consumers. The better-than-expected April retail sales report on Friday did little to truly answer those questions.
The bad news started the week before, when fitness wearables market Fitbit (FIT) dropped nearly 19 percent on May 6 after announcing a deceleration in unit sales growth and weak Q2 forward guidance. Action camera maker GoPro (GPRO) was also hit hard on inventory write-downs. These are supposed to be two of the hottest consumer areas of the economy right now. And yet the magic seems to be fading.
More negative headlines followed. On May 8 the New York Post reported JC Penney was taking emergency measures, including slashing payroll and freezing overtime, in light of weak April sales. The retail gloom came in the context of weak U.S. economic data, including soft consumer spending (as the savings rate rises), an underwhelming Q1 GDP growth report, a tepid April jobs report and ongoing stalling in the manufacturing sector.
On May 9, Gap (GPS) was hit by a surprise same-store sales decline in April of 7 percent vs. the 0.5 percent gain expected. It guided Q1 earnings would come in at 31 cents to 32 cents per share vs. the 44 cents analysts were expecting. Shares have since dropped nearly 20 percent.
On May 10, watchmaker Fossil (FOSL) plunged 25 percent in extended trading after reporting a top- and bottom-line miss along with weaker-than-expected comp-store sales (down 3 percent vs. a 0.4 percent expected drop).
On May 11, Macy's (M) plunged 15.2 percent after reporting a 7-plus percent drop in sales, its fifth consecutive quarterly sales decline. Forward guidance was cut as well. Earnings came in at 40 cents (vs. 36 cents expected) while sales totaled $5.77 billion (vs. $5.95 billion expected). Same-store sales dropped 5.6 percent. Shares dropped all the way back to 2012 levels. And Ross Stores (ROST) lost 5.4 percent after being downgraded by analysts at Piper Jaffray on valuation and a weakening consumer spending environment as interest in off-price stores wanes.
The hits just kept on coming. On May 12, Kohl's (KSS) lost 9.2 percent after reporting a Q1 earnings miss on weaker revenues and a 3.9 percent drop in comp-store sales (vs. 0.2 percent growth expected). After the close, Nordstrom (JWN) fell more than 17 percent after reporting a top- and bottom-line Q1 miss on a 1.7 percent drop in comp-store sales. Forward guidance was cut as well.
The trend is clear: Americans just aren't shopping, possibly because wholesale gasoline prices have bounced more than 50 percent from their mid-February low.
Yet the strong April retail sales report added some confusion, as it showed nice increases in spending on clothing, autos and furniture. The result was the largest monthly gain in spending in more than a year — one that will likely boost Q2 GDP growth close to a 3.0 percent annualized rate, according to Capital Economics.
Combined, the earnings and economic data suggest we’re seeing the results of changing consumer behavior and shifting prices: Online retailers like Amazon.com keep gaining market share, eating away at the sales of traditional retailers. And prices for certain categories of purchases, such as apparel, aren’t keeping pace with inflation, further pressuring those old-school giants. More importantly, surveys have found that Americans are choosing to spend their money differently, placing increasing emphasis on services and experiences over stuff. Plus, rising rents and medical costs may be drawing dollars that would otherwise go toward a new outfit or a fresh pair of shoes.
Some of those shifts won’t affect the economy or market as a whole. Others will. For now, stocks seem to be believing the dour story coming from retailers themselves rather than the one from government statisticians.